Things You Should Know About Franchising

Posted on Wednesday 23rd of April 2014 by

Manish Khanna

When people think of franchises they often think of large fast food or restaurant chains, hotel chains, and convenience stores such as McDonald’s, Kentucky Fried Chicken, Applebees, Wyndham Hotels, and Carrefour. What most people do not realize is that Franchising has been around since the 1850’s and there are thousands of franchise companies in 120 different business categories worldwide ranging from accounting services to health care to shipping companies and more.

Franchising is a way for someone who may not have an idea of their own or a large amount of business experience to get into an already established business for themself by selling someone else’s products using their proven business format. It also provides a business with a method of expansion without a huge outlay of capital.

The concept of franchising began with the invention of the sewing machine when Isaac Singer needed a way to get his new product out to the public. In order to reach different areas of the U.S. he developed a business plan to license people interested in selling his machine and charged them a fee for the license.

Since then franchising has become a standard operating practice for companies with a solid business structure to expand their brand by selling licenses to entrepreneurs interested in selling their products. The biggest and most well-known company to take the franchise method and run with it is McDonald’s. McDonald’s started out in 1955 as a small independently owned fast food chain, and has become the world’s largest franchise with more than 33,000 franchisees in 118 countries, this includes some of the most repressed and volatile areas of the world, such as:

Costa Rica

South Korea

China

Ukraine

Lebanon

Pakistan

Iraq

And Vietnam

This makes McDonald’s the most successful franchise in franchising history. McDonald’s has proven by example that franchising allows a company to expand into markets that would not otherwise be possible, creating growth opportunities that would be missed otherwise.

Although franchising started out as an American concept, it has expanded to be a world business practice. On the “Top 100 Global Franchises – 2014 Rankings” published by Franchise Direct, there were nine countries including the U.S. represented. Excluding the U.S., Spain held two spots on the list at number 10 and number 41, The United Kingdom had two spots at numbers 15 and 83, France had six spots on the list ranking 29th, 34th, 38th, 63rd, 67th, and 94th, Canada also held six spots in the rankings, followed by Australia ranked at 78th and 79th, and Germany, Sweden and Japan who each had one spot on the list.

Franchise agreements vary significantly depending on the company, the type of business, what country it is located in, and the investment itself. Generally though, Franchise agreements provide the investor with product, a branded name and recognition, and a support system, that a brand new start-up company would not have.

This is what makes buying into a franchise so appealing to a lot of people. These perks do not come without a cost though. Buying into a franchise can cost anywhere from the low $1,000 mark to several hundreds of thousands of dollars depending on the company. These are just the buy-in fees though. There are also operating and start-up costs just like with any other business. Read more about business ownership in businesses2sell.

Some franchises require your business to look a certain way in order to follow their format, so start-up costs could be more than you would have if starting your own business from scratch. There might also be royalty fees and franchise renewal fees involved. It is important when considering a franchise to look at all of the expenses of running the business and make sure you have enough capital to maintain the business for at least 6 months in case there are any unforeseen delays or situations that would affect your new businesses earnings. Also, consider how any on-going royalty or renewal fees would affect the bottom line of the business.

Buying a franchise is not a sure fire recipe for success, even franchisees can fail because the systems and support are available and some fail because the person doesn’t follow the systems.

Some reasons why franchisees fail can be as follows:

The franchisor doesn’t select the right location (researching clientele, competition and possible clientele is important)

The franchisor tries to swamp the area with franchisees (territories must be structured correctly)

The franchisor systems and support aren’t easy to follow (systems must be easy to follow by anyone including people without previous experience)

The franchisor has the wrong financial and motivational structure for itself (i.e. the main income for a franchise should never be franchise sales, this leads to it trying to sell franchises more than generate sales for its franchisees)

The franchisee doesn’t follow the systems or listen to the support (some franchisees believe they know better and then try to blame the franchisor when it goes wrong)

That is why it is important to read the fine print and make sure the company you are looking into buying into provides an adequate training and support system as well as what additional fees may be involved.

New franchises are surfacing regularly creating investment and career opportunities on a global scale in just about any industry. Franchise Business.com the directory used by the Franchise Counsel of Australia, boasts listing more than 1,200 Australian franchise opportunities and offering financial, legal, and business advice to those interested in pursuing a possible franchise investment. There are many other organizations available as well to guide someone through the franchising process, whether they are a business looking to franchise, or an investor looking to buy.

The Franchise Counsel of Australia (FCA) has information, services, and guidelines to assist anyone interested in franchising in Australia. Additionally they offer information and resources for “Women in Franchising”, and a “Franchise Hub” for networking.

No matter what kind of franchise investment, it is always good to have someone who knows about the business of franchising, is knowledgeable about the territory or region that the new location will be in (i.e. they have done their research and know about the area and can explain why this is a good location, not just because they need the money in the area), has knowledge on the companies that are available and is willing to explain all of the potential costs as well as the benefits of buying into any particular company or franchising an existing company.

A broker will be able to do these things. Just make sure that when looking for a broker to assist with franchise investments, that they are reputable and both accredited and knowledgeable within the region of interest for expanding into. Different countries have different criteria and requirements in addition to each company having their own investment requirements.

Check to see the origin of the company of interest, and what laws are applicable to that company with reference to where the new location would be. City ordinances, county regulations, state, province and country laws can all affect the start-up and long term structure of any business whether they are an established franchise or not, especially if the prospective new location is in a new region. Look at the areas cultural environment as well.

The McDonald’s in china is substantially different than the McDonald’s in Australia or the U.S., greatly because of the cultural, climate and food preferences. A local broker should be able to point out these nuances prior to making the investment to give the investor a more educated decision foundation.

These resources are also beneficial to those businesses looking to franchise themselves. The cost of expansion, even for one new location can be substantial. Franchising provides the opportunity for larger expansion while making money instead of a large outlay of financial resources that could ultimately put the original location in jeopardy if the new location becomes more of a drain than an income source. The potential for growth could also be substantially larger than if the individual did the expansion on their own.

The bottom line here is franchises are a viable, lower risk option for getting into business for one’s self or for expanding an already existing business. But they are not fool proof; they do come at a cost and vary widely from business to business even within the same industry, making it vital to compare franchise options before investing.

It is also a good idea to have a representative that is knowledgeable within the region as well as within the franchising industry to help guide potential franchisees through the initial search and investment process. Having a solid support system and sufficient financial backing to get through the start-up phase and any other obstacles that might surface will minimize the risk of failure for any business and is a key component to a successful franchise. A franchise should simply provide the investor with more of the up-front and sustainability resources than starting an up-start company would.